Prefer recent statistics throughout the past decade that shows IRS is capable to enforce tax evasion regulations

Empirical studies generally find that audits increase tax compliance.1 Audits have three types of effects. First, they bring in direct revenue. For example, “IRS enforcement activities in fiscal 2017 produced $56 billion in revenue, of which $12 billion was from auditing, while the entire IRS enforcement budget was $4.7 billion.”2 And, of course, an increase in the number of audits brings in more revenue, particularly when audit rates are as low as they currently are for the IRS.3 2

Second, audits have an important pro-compliance effect on taxpayers who are not audited. Studies analyzing the effect on tax payments of increased audit rates typically find a very positive effect.4 This in itself provides a compelling reason to maintain an audit presence. Estimates of the indirect effect of audits vary from $4 to $12 for each $1 directly collected from enforcement.5 Thus, the “spillover” effect of audits on tax collections is much larger than the direct effect of audits.6 Accordingly, an increase in the direct revenue from audits is only a portion of the gains from increased audits. It is also worth noting that studies have found that tax penalties do not have nearly the deterrent effect that audits do.7

Third, audits have an indirect effect on the future tax payments of those who are audited in a particular year. For example, a recent study of IRS data on individuals found in part that “an audit increases subsequent reported wage income by 1.3 percent and sole-proprietorship income, reported on schedule C of form 1040, by 14.2 percent on average.” 8 The study also found that “audits have a long-term effect on tax reporting.”9 Note that this study found that “the effect of audit is much larger when there is less third-party reporting ….”10 This result is consistent with the fact that taxpayers have much less opportunity for noncompliance with respect to income that is reported to the IRS by third parties, as discussed below.

There are several recent studies that looked at the effect of audits on subgroups of audited individual taxpayers. Those studies generally found that taxpayers who are audited and found to owe additional tax for that year increase their tax payments in subsequent years. By contrast, these studies generally found that taxpayers who are audited and not found to owe additional tax decreased their tax payments for the succeeding years, although the results were not always statistically significant. 11 These results are consistent with the idea that taxpayer concern about the prospect of owing taxes has a deterrent effect. Individuals who were not found to owe additional tax may conclude that they had overpaid taxes (especially if they were issued a refund) or that they have a “safe” period in which to report less tax, especially if audits are non-random.12

It is difficult to be certain from these studies whether a tax collector should select its taxpayers for audit more carefully—to better identify taxpayers who owe tax—or do more thorough audits, so as to increase detection of underreporting. However, a recent laboratory experiment found that “audit effectiveness is an important determinant of the specific deterrent effect of audits. Taxpayers declare a larger share of their income after experiencing an audit that detects all undeclared income while ineffective audits decrease post-audit compliance.”13 While further research in this area would be helpful, this study supports the intuitive notion that audit effectiveness affects specific deterrence with respect to those audited.